Splitsville: Topgolf Callaway Is Officially Breaking Up

Topgolf Callaway has made official what many have been expecting over the last month. The company is officially splitting up.

In an announcement to investors late yesterday, Topgolf Callaway announced it will spin off the Topgolf business and create two separate and independent companies. Topgolf will go one way. Callaway golf equipment and active lifestyle brands will go another.

You can call it an amicable divorce.

You can also call it a reset to January of 2021, before the Topgolf-Callaway merger.

The split is expected to be finalized by the second half of 2025.

There’s a considerable amount of information to unpack here but it needs to be understood that neither company is teetering on the brink of bankruptcy. What appears to be happening is the final realization that Topgolf and Callaway, as business models, are too different in terms of capital investment requirements and quarter-to-quarter results to stay together.

On Divorce Court, they’d call it “irreconcilable differences.”

Breaking up is hard to do

“Over the last decade-plus, we have transformed Callaway into the number one brand in golf equipment, while building a successful and complementary apparel and accessory business,” CEO Chip Brewer told investors yesterday. “Since our merger with Topgolf, we have made considerable investments in the Topgolf business that have dramatically expanded its scale, digital capabilities and venue profitability.”

That’s the window dressing. The bottom line, however, is that, after a three-year marriage, the two business models were simply a bad match.

“Topgolf has a different operating mode, capital structure and investment thesis than Callaway,” said Brewer. “As a result, the Board has determined that separating Topgolf will best position Topgolf and Callaway for success and maximize shareholder value.”

In plain English, that means the growth and profitability expectations for Topgolf and Callaway are different and ultimately proved to be incompatible.

As Topgolf Callaway Chairman John Lundgren said yesterday, “The creation of two different companies, each with a distinct focus and proven business model, is intended to drive continued momentum in both businesses and deliver value to all our shareholders.”

What will the Topgolf Callaway split look like?

Topgolf Callaway expects the split to become final sometime in the second half of next year, although the company isn’t dismissing the idea of a “reconciliation.”

The terms of the split have advantages for both parties. First, Callaway will be freed from Topgolf’s funding needs as each new Topgolf venue eats up a lot of capital. The announcement reads, “The separation will position both companies to implement appropriate capital investment.” In other words, an independent Callaway’s bottom line (and, we presume, stock prices) won’t be impacted by Topgolf’s capital investments needed to build new venues. On the other hand, Topgolf will be able to invest in its own business without worrying about how it will impact the combined company’s bottom line (and, we presume, stock prices).

The new, independent Topgolf is getting a generous settlement. The company will spin off at least 80.1 percent of Topgolf which, according to the report, makes the transaction tax-free. Callaway will also retain all existing Topgolf Callaway financial debt. Topgolf will retain venue financing obligations but otherwise leaves the marriage with no financial debt to speak of, along with a significant cash balance.

Significantly, existing Topgolf Callaway shareholders will receive a pro-rata allocation of shares in the new publicly traded Topgolf company.

That’s important to note. Topgolf isn’t being “sold off” or “dumped.” Rather, it’s being spun off as an independent company with existing shareholders getting a stake. Callaway will retain partial ownership in Topgolf for at least a while.

Chip Brewer will stay on as CEO of Callaway. Artie Starrs, the current head of Topgolf, will be that company’s CEO.

The new Callaway will include the Golf Equipment and Active Lifestyle units, along with Toptracer, which was part of Topgolf at the time of the merger.

How did it come to this?

Topgolf and Callaway merged in February 2021 and branded itself Topgolf Callaway. The $2-billion deal blasted the new company into the stratosphere, making it by far the biggest name in golf. Each of the company’s three business units (Topgolf, Golf Equipment and Active Lifestyle), is a billion-dollar entity on its own.

The partnership hit the rocks last November following the company’s Q3 financial report. Despite showing more than $1 billion in quarterly sales and $30 million in quarterly profit, Topgolf posted its second less-than-expected results in a row. For the second straight quarter, same venue sales were down, and not by a little. Topgolf Callaway had expected considerable same-venue sales growth for 2023 but, instead, those venues were going backward.

That made investors skittish but the resulting downward guidance for sales and EBITDA projections gave them the heebie-jeebies. Stock prices went into an immediate tailspin, dropping 37 percent from the beginning of the year. A share that sold for $25 in January could be had in November for less than half that.

Things didn’t get any better over the first two quarters of 2024, Topgolf revenues were growing but same venue sales kept going backward. The only thing driving revenue growth was new venues.

You don’t have to be E.F. Hutton to know that’s not sustainable.

The Topgolf Callaway “strategic review”

In August, Topgolf Callaway announced an ongoing “strategic review” of the Topgolf business that included a possible spin-off of Topgolf.

That announcement spurred another fast decline in stock prices. On August 23, Raymond James analyst Joseph Altobello downgraded Topgolf Callaway stock, advising his clients to avoid the stock until the potential spin-off was resolved. At that point, Topgolf Callaway stock had dropped 22 percent for the year. It bottomed out at $10.04 per share last Thursday with nearly 5 million shares traded. Two million had been the daily norm.

Altobello warned the impending Topgolf spin-off might be too late. That may have played a role in the timing of yesterday’s announcement. Topgolf Callaway stock closed yesterday at $10.76 per share. The announcement was made after Wall Street trading closed, but the stock jumped over 12 percent in after-hours trading.

Looking at the split as a divorce, both sides appear to be working together for the sake of the children who, in this case, are the investors. The company is touting the golf division’s position as number one in golf club sales and a growing number two in golf ball sales, with nearly $1.4 billion in sales over the last four full quarters. Active Lifestyle sales over the last four quarters topped $1.1 billion.

It’s interesting to note that Toptracer is staying with Callaway. Toptracer is what self-proclaimed “real golfers” want Topgolf to be. It provides launch monitor capabilities and golf course simulation at your local driving range. The company has doubled the number of Toptracer-equipped driving range bays since 2021. Revenues are relatively small at $46 million but Callaway sees a future with that technology.

No one’s going broke, people …

Headlines are one thing, details are another. We’re talking about two entities that are market leaders and are profitable. Topgolf Callaway’s quarterly financial results may be a rollercoaster ride but the year-end ink is usually black.

Topgolf, Active Lifestyle and Golf Equipment all turn a profit and none of those entities is heading for the proverbial financial iceberg. You may think Topgolf is too expensive and isn’t for “real” golfers but it’s never lost money. It needs obvious restructuring to bolster same-venue sales but it’s been profitable from the day the merger was completed. The company will slow expansion over the next year. Only five or six new venues are now planned for 2025. But long term, the company says there’s room for up to 250 venues in the U.S. and another 250 abroad.

Whether that’s a legitimate opportunity or an overly rosy scenario for investors remains to be seen. In its presentation yesterday, the company painted an optimistic picture for Topgolf. It cited a 2.5-year construction cost payback for a new venue, along with an 18- to 22-percent return on gross investment. The fact the new company will be going out on its own with no financial debt and plenty of cash on hand appears to be an effort to make potential investors more comfortable.

Topgolf Callaway: What happens going forward?

For now, nothing that matters to the everyday golfer or Topgolf fan. Everything available to you yesterday will be available to you today and for the foreseeable future. As mentioned, the “divorce” won’t be final until the second half of next year. In the meantime, both sides will be preparing for the split.

One thing to note, however, is a nagging story from this past March. A South Korean newspaper reported that Topgolf Callaway’s three biggest investors were joining together to sell their ownership rights. According to The Chosun Dailey, the plan was to spin off Topgolf. The next step would be to sell Callaway’s golf and apparel business for $3 billion.

Those investors, Thomas Dundon along with BlackRock Advisors and Providence Equity Partners, together own 33 percent of Topgolf Callaway. A South Korean private equity firm was rumored to be a leading candidate to buy the Callaway golf and apparel business.

At the time, Topgolf Callaway management denied the story. However, here we are not quite six months later and the Topgolf spinoff is happening.

The Chosun Daily also reported the Callaway would also be put up for sale. There’s a chance this story might not be over yet.